Monday, 28 May 2018

Growth Commission Claims

Having written a couple of work-in-progress blogs on this topic (here and here), I thought it might be helpful to summarise what we've been able to conclude so far about the claims made in the SNP's Growth Commission report.

To be absolutely clear: this is not a critique of the ideas in the report , it is solely a critique of the GDP/Capita and growth rate assumptions the report uses to make its economic case.

1. The £4,100 "independence boost for every Scot" claim used in headlines is nonsense

That's a GDP number - the related Government revenue number the report itself uses is c. £1,600 per person1

The justification for that number is "if we had the same GDP/Capita as the Netherlands". Hard to believe I know, but there is no more justification for the figure than that2

The Netherlands is not even among the countries the report name-checks when it says the report "learns in particular from Denmark, Finland and New Zealand"

That figure is anyway only enough to nearly off-set the loss of the fiscal transfer that currently results from pooling & sharing within the UK3 - something we would of course lose on day one of independence

2. The report claims it would take 25 years to achieve this, based on a GDP/Capita growth rate 0.7% pa superior to that we'd achieve remaining in the UK . The analysis behind the 0.7% assumption is, to put it mildly, not robust

That figure is arrived at by comparing the long run GDP/capita performance of a list of countries including high growth countries Hong Kong and Singapore

The report explicitly rejects the low tax, high income-inequality models that HK and Singapore pursue - but if we remove them from the analysis the 0.7%4 figure immediately drops to 0.26%

This alone would change the 25 year time horizon (to achieve a figure we've already seen is based on a crudely simplistic comparison) to 67 years

If we look at the average growth rates of the three economies whose economic models the report actually suggests we most seek to emulate (Denmark, Finland and New Zealand) ... well in fact they don't show superior growth rates to the "large advanced economies" at all5

The entire economic case in the report is built on the foundation of this 0.7% figure - it is a figure that frankly isn't credible

At the very least the report should have shown a sensitivity analysis to highlight what would happen if that 0.7% turned out to be 0.26% - or indeed if it turned out to be the 0.12% figure the independence White Paper previously used. Of course we know the answer because it's a linear relationship; 25 years becomes 67 years becomes 146 years!

3. The report does not present a case for independence because many (possibly most) of the recommendations in the report could be implemented using existing devolved powers or - in the case of immigration in particular - modified powers.

Even then, we certainly can't attribute all of the benefits of the economic model suggested to independence because as the report itself concedes "many of our recommendations could be agreed and implemented [...]6 either with existing or enhanced policy responsibilities for Scotland's Parliament and Government"

But the problem around currency that the report seeks to address (with the much-maligned sterlingisation recommendation) is a problem that is only created by independence

The report implicitly recognises that creating a Scottish currency would require economic sacrifices that would be unpalatable to voters - but the sterlingisation model recommended implies a very compromised version of independence

The report fails to quantify any of the Brexit-esque downside of independence - if separation from the EU single market damages us, separation from the UK single market would logically damage Scotland's economy far more

To take one high profile example: the report recommends that "the headline rate of corporation tax should not rise above the level prevailing in the rest of the UK" - so, unless we want Scotland to start competing as a low-tax regime, there isn't even an argument here for devolving corporation tax powers

So there we have it: the "the economic boost" headlines spun from the report are ridiculous, the report's assumptions on growth rates (and hence the 25 year timescale to achieve) are extremely optimistic and based on poor quality analysis ... and the report doesn't make a case for independence anyway.

Notes

1. £9bn pa is actually quoted in the report, which using today's population would be £1,665 per person - but in my attempts to replicate the figure it looks like the £9bn is a rounded-up number

2. I detail the full analysis here - basically the Netherlands is the median country you find if you rank their arbitrarily defined list of "small advanced economies" in order of GDP/Capita

3. Based on the most recent figures, I've calculated this figure to be £10.3bn - details here

4. Actually 0.65% if we're being fussy - full analysis including effects of cohort selection blogged here (where I also recreate the analysis using the somewhat different cohort used in the independence White Paper)
5. Using the same data sources and same time periods for comparison as the Growth Commission, as detailed here - a point rather nicely illustrated here

6. From p.9 - The words I've taken out here are "in advance of independence", because those words are redundant unless you assume (as the report does) that independence must be the ultimate goal no matter what the economic case suggests

7 comments:

I don't understand your second point re immigration. Is Scotland getting new fandangled immigration powers? Pray tell, what are they and when are they coming (and how do we get them? By right or by privilege?)

Peter - despite nonsensical claims about "westminster power grab", it is demonstrably the case that the powers held by the Scottish Government have only ever been increasing since the original devolution settlement. I'm merely repeating the observation the Growth Commission report itself makes: it would be possible to remain in the UK but have greater control over immigration if the devolved powers were further added to

Oh dear oh dear - all I have done here is replicate the Growth Commission's own analysis and show how sensitive it is to the inclusion of Hong Kong and Singapore (low tax, high-inequality economic models that the Growth Commission rejects) in their "we could be like them" cohort.

I'm not saying what will happen in 67 years, I'm just showing how sensitive the *claim the Growth Commission makes* (about what can be achieved in 25 years) is to the rather bizarre decision to include HK and Singapore in their analysis.

But if you read the blog and followed the links, you'd already know that.

Immigrants are to provide much of the projected growth spurt. We don’t need new powers to attract more immigrants from (or via) England, Wales and Ireland. We just need to become more “migration-friendly”. That'll be a start.